Question 7

c) A bank can increase its capital adequacy ratio by switching some funds from advances to buying more company shares.

d) A bank can increase its capital adequacy ratio by selling some company shares and lending the proceeds as mortgages.

Question 8

Which of the following would not shift the money demand curve to the right?

a) A move which means that all workers who were in the past paid weekly will in future be paid monthly.

b) A rise in incomes.

c) A rise in wealth.

d) A fall in the interest rate.

Question 9

Which of the following methods of intervention in the money market has not been used in the UK since the 1980s?

a) Monetary base control.

b) Interest rate control.

c) A change in the regulations about banks' reserve ratios.

d) Monetary base control.

Question 10

Suppose the Bank of England reduces Bank Rate. Which of the following statements is false?

a) The Bank will be able to ensure that the money market ends up with whatever interest rate and money stock it wishes.

b) The money supply curve will shift right.

c) The interest rate on market loans within the UK will decrease.

d) Banks will be willing to lend to riskier customers than previously.

Question 11

Which of the following statements about the IS curve is false?

a) It shows that the lower is the interest rate, the higher is the equilibrium level of output.

b) The more responsive planned spending is to changes in the interest rate, the more interest elastic is the IS curve.

c) A fall in the interest rate will shift IS to the right.

d) An increase in exports will shift IS to the right.

Question 12

Which of the following statements about theLM curve is false?

a) An increase in the demand for money will shift LM right.

b) An increase in the supply of money curve will shift LM right.

c) It shows that the higher is the level of output, the higher is the equilibrium rate of interest.

d) The more interest elastic is the demand for money, the more interest elastic is the LM curve.

Question 13

Suppose that at present an economy is at some distance from the equilibrium position where the IS and LM curves intersect, and is on neither the IS curve nor the LM curve. Which of the following most accurately states what will happen?

a) The economy will move rapidly to the equilibrium.

b) The economy will move rapidly to the point on the LM curve that applies to the current level of output, and then move slowly along the LM curve to the equilibrium.

c) The economy will move rapidly to the point on the IScurve that applies to the current rate of interest, and then move slowly along the IS curve to the equilibrium.

d) The economy will move slowly to the new equilibrium, and will not be on either the IS curve or the LM curve until it reaches this equilibrium.

Question 14

Suppose there is an initial increase in planned investment of £100 billion a year, and suppose the multiplier is four. Which of the following statements is false?

a) By ignoring the fact that a rise in output will lead to higher interest rates, the multiplier model will predict that the planned expenditure line will end up £100 billion a year higher than it started.

b) By ignoring the fact that a rise in output will lead to higher interest rates, the multiplier model will predict a rise in output of £400 billion a year.

c) By allowing for the fact that a rise in output will lead to higher interest rates, the IS-LM model will predict a rise in output of less than £400 billion a year.

d) The IS curve will shift to the right by less than £400 billion a year.

Question 15

Which of the following statements is false?

a) If spending is very responsive to changes in interest rates, and the demand for money is interest inelastic, then monetary policy tends to be more powerful than fiscal policy.

b) If spending is not very responsive to changes in interest rates, and the demand for money is interest elastic, then fiscal policy tends to be more powerful than monetary policy.

c) It might sometimes make sense for a government to combine an expansionary monetary policy with an expansionary fiscal policy.

d) It would never make sense for a government to combine an expansionary monetary policy with a contractionary fiscal policy.